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Relevant Property Trust

Also known as: RPT, Discretionary Trust

Definition

A Relevant Property Trust is any trust subject to special inheritance tax charges when assets enter the trust, every 10 years, and when assets are distributed to beneficiaries—most commonly discretionary trusts created since March 2006.

Understanding this tax regime is essential for anyone considering placing property, investments, or other substantial assets into trust, as the ongoing charges can significantly affect the cost-effectiveness of this estate planning strategy.

What Does Relevant Property Trust Mean?

Under Section 58 of the Inheritance Tax Act 1984, "relevant property" is defined as settled property (assets held in trust) in which no qualifying interest in possession exists. The Finance Act 2006 fundamentally changed trust taxation from 22 March 2006, bringing most lifetime trusts into this regime. Discretionary trusts are the most common type, though the term describes tax treatment rather than trust structure.

The relevant property regime subjects trusts to three inheritance tax charges. The entry charge applies when transferring assets in—up to 20% on amounts exceeding £325,000. If David transfers £500,000 into trust and has used £200,000 of his nil-rate band previously, he faces an immediate £75,000 charge. The periodic charge applies every 10 years at up to 6% of trust value above available nil-rate band. A trust holding £650,000 at its anniversary might pay up to £19,500. The exit charge applies when assets leave the trust, calculated proportionately based on time since the last periodic charge.

Trustees must file IHT100 forms within six months of charges arising. Calculations depend on the settlor's lifetime transfers in the seven years before trust creation and any distributions in the previous ten years, making professional advice essential.

People create relevant property trusts for flexibility, beneficiary protection, and control over distributions. For large estates, periodic charges may cost less than 40% inheritance tax on death. However, a £1 million property portfolio could face £40,500 every 10 years—over £120,000 across 30 years. Careful cost-benefit analysis is essential.

Common Questions

"Is a discretionary trust the same as a relevant property trust?" Not exactly—all discretionary trusts created since March 2006 are relevant property trusts, but the terms describe different aspects. "Discretionary trust" refers to the structure, while "relevant property trust" refers to the tax treatment with entry, periodic, and exit charges.

"How much does the 10-year anniversary charge cost?" The periodic charge is up to 6% of trust value above £325,000. If your trust holds £500,000 at the anniversary, you'd pay up to £10,500 (6% on £175,000). The exact rate depends on the settlor's lifetime transfers, requiring professional calculation.

"Should I put buy-to-let properties in a relevant property trust?" Not automatically. While trusts can protect assets after seven years, periodic charges of up to 6% every 10 years accumulate significantly. For a £1 million portfolio, you might pay £40,500 every decade. Professional cost-benefit analysis is essential.

Common Misconceptions

Myth: "Putting assets in a trust means they're free from inheritance tax"

Reality: Relevant property trusts face immediate charges when assets go in (up to 20% on amounts over £325,000), every 10 years (up to 6%), and when assets come out (up to 6%). Before Finance Act 2006, many trusts avoided these charges, explaining why older advice about "inheritance tax shelters" no longer applies.

Myth: "The 10-year charge only applies if the trust exceeds £325,000"

Reality: Calculations consider the settlor's lifetime transfers in the seven years before trust creation, plus distributions in the previous decade. If the settlor used their nil-rate band previously, even small trusts face charges. Multiple same-day trusts may share one nil-rate band.

Understanding Relevant Property Trust connects to these related concepts:

  • Discretionary Trust: The most common type of relevant property trust.
  • Property Protection Trust: Can be structured as relevant property trusts with significant periodic charge implications.
  • Inheritance Tax: The relevant property regime is a specific IHT framework.
  • Periodic Charge: The ten-year anniversary charge at up to 6% of trust value above nil-rate band.
  • Exit Charge: The proportionate charge when assets leave the trust.
  • Settlor: The trust creator whose lifetime transfers affect charge calculations.
  • Trustee: Legally responsible for calculating, reporting, and paying trust charges.

Need Help with Your Will?

Understanding complex trust structures and their tax implications is essential for effective estate planning. While relevant property trusts can be powerful tools for protecting assets and maintaining flexibility, they're not suitable for everyone.

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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal or tax advice. Relevant property trust taxation is highly complex and depends on your specific circumstances, including previous lifetime transfers, trust structure, and asset values. The examples provided are illustrative only. Always obtain professional advice from a qualified solicitor and tax adviser before creating a trust or making trust-related decisions.